Geopolitical Risk and Global Supply Chain Dynamics
Lei Zhuang  1@  , Lixin (nancy) Su  2  , Jing Zhao  2  
1 : The Hong Kong Polytechnic University [Hong Kong]
2 : The Hong Kong Polytechnic University [Hong Kong]

As a significant buyer in the intricate web of the global supply chain, the United States is susceptible to fluctuations and uncertainties in its international suppliers. We study how U.S. firms react to their supplier country's geopolitical risk. Employing the geopolitical risk index developed by Caldara and Iacoviello (2022), we find that the supplier country's geopolitical risk is positively associated with the break of U.S. firms' global supply chain relationships. The supply-chain relationship is more resilient when supplier-customer incentive alignment is stronger. Specifically, the impact of geopolitical risk is mitigated when the supplier country aligns more closely with the U.S. in United Nations voting, when the U.S. customer has more suppliers from the supplier country, and when the supply chain relationship duration is longer. As a substitute for the broken supply-chain relations, managers tend to replace their global suppliers with domestic ones and suppliers in countries with lower geopolitical risks. Additionally, once a supply-chain relationship is severed, managers are unlikely to restore it until the geopolitical risk in the supplier country decreases. 



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